- En Torno a La Funcion Del Capital, Joaquín Reig
- Reflections On the Keynesian Episode, W. H. Hutt
- Ludwig Von Mises and the Market Process, L. M. Lachmann
- Values, Prices and Statistics, Bettina Bien
- The Tax System and a Free Society, Oswald Brownlee
- How “should” Common-access Facilities Be Financed?, James M. Buchanan
- Pitfalls In Planning: Veterans' Housing After World War Ii, Marshall R. Colberg
- Presents For the Poor, R. L. Cunningham
- Restrictions On International Trade: Why Do They Persist? W. Marshall Curtiss
- “human Action”, E. W. Dykes
- The Genius of Mises' Insights, Lawrence Fertig
- On Behalf of Profits, Percy L. Greaves, Jr.
- Tax Reform: Two Ways to Progress, C. Lowell Harriss
- The Future of Capitalism, Henry Hazlitt
- Prices and Property Rights In the Command Economy, Arthur Kemp
- The Inevitable Bankruptcy of the Socialist State, Howard E. Kershner
- Entrepreneurship and the Market Approach to Development, Israel M. Kirzner
- The New Science of Freedom, George Koether
- Financing, Correcting, and Adjustment: Three Ways to Deal With an Imbalance of Payments, Fritz Machlup
- On Protecting One's Self From One's Friends, Don Paarlberg
- Recollections Re a Kindred Spirit, William A. Paton
- Ludwig Von Mises, William H. Peterson
- The Economic-power Syndrome, Sylvester Petro
- Ownership As a Social Function, Paul L. Poirot
- To Abdicate Or Not, Leonard E. Read
- The Book In the Market Place, Henry Regnery
- Lange, Mises and Praxeology: the Retreat From Marxism, Murray N. Rothbard
- The Production and Exchange of Used Body Parts, Simon Rottenberg
- The Education of Lord Acton, Robert L. Schuettinger
- Chicago Monetary Tradition In the Light of Austrian Theory, Hans F. Sennholz
- Hubris and Environmental Variance, Joseph J. Spengler
- An Application of Economics In Biology, Gordon Tullock
- What Mises Did For Me, John V. Van Sickle
- Economics In a Changing World, G. C. Wiegand
- Can a Liberal Be an Equalitarian? Leland B. Yeager
- The Political Economy of Nostalgia, Ramon Diaz
Prices and Property Rights in the Command Economy
Arthur Kemp
Of the many discussions to which Ludwig von Mises has contributed over his long and productive career, few are more famous or of greater importance than the question of pricing and production in a command economy or, as Mises phrased it, the problem of rational economic calculation in a socialist state. The classic Mises article was titled, “Die Wirtschaftsrechnung in Sozialistischen Gemeinwesen,” in Archiv fur Sozialwissen-schaften, Vol. XLVII, No. 1 (April, 1920), and which he subsequently expanded in Gemeinwirtschaft (Jena, 1922; 2d. ed., 1932). An English translation of the original article appears in F. A. Hayek, ed., Collectivist Economic Planning (London, 1935). Gemeinwirtschaft appears in English translation as Socialism (London, 1936) and later as Socialism: An Economic and Sociological Analysis (New Haven, 1951).
Although it may not be true to say that Mises was the first to turn his attention to the problem, the original article together with its subsequent additions became, as Hayek expressed it, “the starting point from which all the discussions of the economic problems of socialism, whether constructive or critical, which aspire to be taken seriously, must necessarily proceed.”1/
Mises argued, in essence, that in the absence of market price determination and private ownership of the factors of production such as land and capital, a rational and efficient allocation of productive resources was not possible. This forms the heart of a dispute between socialist economists and market economists which has endured for a long period of time and has produced a very sizeable literature that is still expanding.2/ Examples of it, from both sides, are included in most of the important books of readings concerned with the study of comparative economic systems.3/ Most socialist economists have rejected the Mises criticism dogmatically and categorically, although one should probably except Oskar Lange, A.P. Lerner, and a few others, but none have been able to ignore it.
Indeed, the inter-relationship of prices and the productive process—the problem of rational calculation—could, and perhaps should, be employed as the central theme for a discussion of the differences and similarities among variant economic systems and societies. Prices provide a mechanism facilitating the choices necessary under all economic systems: choices involving the balancing of scarce means against competing ends. We are prone, understandably, to regard prices primarily as a phenomenon of markets and money, but this is a self-imposed limitation for convenience in order to focus attention on measurable, objective prices. In a more fundamental sense, price behavior is not confined to monetary manifestations alone, and in some societies or systems the non-monetary, non-market price behavior may be the most interesting and the most significant.
It also seems clear that, even in economic systems essentially market-oriented, non-market prices may be of considerable economic interest. Each of us would be willing to accept, for example, a lower wage (salary? money income? price?) for better working conditions, or more leisure, or more beautiful (stimulating? provocative? soothing? cooperative?) colleagues with whom we associate. Prices, in this broad sense, are pervasive in the economic process and, whether or not monetary market expressions of price are also employed, the price phenomenon continues to exist and to be worth careful study by economists. Sometimes, of course, even economists overlook the obvious as evidenced by an American economist who once interviewed several hundred British medical doctors in their respective surgeries (offices) during the early years of the National Health Service. He kept careful notes of the conversations but no record of the time he waited to see each doctor, thus losing a potentially significant piece of empirical evidence.
A very large part of modern economic analysis is, at base, price theory relating to an explanation of how goods are priced and how the remuneration of the factors of production (prices) are determined. The former is usually called price theory; the latter distribution theory—although clearly both have to do with price. Even the currently popular terminology contrasting micro-economics and macro-economics is a division of convenience rather than substance. The aggregates of macro-economic analysis without price theory could not be studied intelligently.4/ It may also be worthwhile reminding the reader that true prices are ex post by nature; true prices are past prices at which an exchange has taken place, or a choice made, or a decision reached. Price theory also attempts to provide a meaningful explanation of the factors determining the process of price formation (and in this sense is ex ante). Empirically, price theory is testable by examining the extent to which its principles are successfully predictive.
Certain kinds of price behavior imply certain institutional arrangements of property rights. Imposing a minimum wage law, for example, alters property rights by forbidding a person to offer his services at less than the specified wage, and forbidding others to purchase these services at less than the specified wage. Prohibition alters property rights by preventing a person from using his resources and abilities to manufacture, transport or sell alcoholic beverages. Similarly, if there is abolition of private property rights in capital equipment, different pricing arrangements are induced than where such private property rights exist. Indeed, as Armen Alchian has pointed out often and eloquently,” ... Every question of pricing is a question of property rights. We could have asked: What system of property rights shall be used? The existing system of property rights establishes the system of price determination for the exchange or allocation of scarce resources. In essence, economics is the study of property rights over scarce resources. Without scarce resources, property rights are pointless. The allocation of scarce resources in a society is the assignment of rights to uses of resources. So the question of economics, or of how prices should be determined, is the question of how property rights should be defined and exchanged, and on what terms.”5/
If this statement is correct, it might be supposed that a system aimed consciously at the virtual elimination of private property rights would mean, at the same time, the elimination of all prices. In point of fact, the first flush of victory of the “dictatorship of the proletariat” in the Soviet Union brought with it a short-lived, idealistic attempt to do away with prices. The necessary condition of doing away with prices, as Alchian points out indirectly, is the elimination of scarcity. In such ordinary, day to day services as street cars and other forms of transport, for example, the Soviets tried zero prices with the predictable results of unbelievable over-crowding. When confronted with the cold facts of reality, the “priceless” experiment had to be abandoned. Of course, there are still some zero prices in the U.S.S.R. (some doctors and other medical care, for example), but this results not in a no-price system but rather a kind of price system that is greatly attenuated.
Two of the several major functions performed by prices can be described as the rationing function and the allocation function. The former is essentially a short run function, serving to adjust consumption to production over short periods—shorter or longer depending on the length of the production process for the particular good. Allocation of resources involves both long run and short run considerations. Both these functions can be performed by prices. Under a pure price system, both functions would be performed by autonomous price movements reflecting both relative price changes within price levels and changes in general price levels. No existing system can be said to be a pure price system. This is another way of saying that property rights are never absolute. But the functions performed by prices are more attenuated in some systems than in others.
As an illustration, let us look at the Soviet “price system” although the functions ordinarily associated with the phrase are so attenuated in the U.S.S.R. that there may be some question whether the term is at all applicable.6/
Prices in the Soviet Union can be considered conveniently in three general categories: (1) agricultural prices; (2) industrial or producer goods prices; and (3) consumer goods prices. Several kinds of agricultural prices are employed, and only one of these can be regarded as determined essentially by market forces of demand and supply. These are prices paid to collective farmers by consumers for produce raised on small private plots. Other agricultural prices are: (1) those imposed upon the collective farms for compulsory deliveries of foodstuffs to government firms; (2) prices paid to state owned farms by state owned marketing organizations; and (3) prices paid for raw or processed foods of the state owned marketing organizations or processing plants by state owned retail stores. All three of these categories of agricultural prices are officially fixed. They are supposed to reflect the average cost of production. In fact, the prices paid to collective farms by the government seem unrelated to cost, and the difference between these prices and those charged to consumers may be regarded as a major form of taxation from which the government obtains funds for the accumulation of real capital.
Industrial prices or producers' goods prices are also fixed prices. In theory, these are also based on the average costs of production in each branch of industry. But in practice these can be altered in various ways by determination of surcharges, allowances, and delivery terms so as to provide the state with an important tool for implementing the basic physical decisions of the central planners. Discretionary changes in producers' goods prices can be used to discourage particular applications, to promote specific techniques, to encourage or discourage use of particular raw materials, to favor particular industries and areas, and in a myriad of other ways. Prices, of course, are essential for accounting and bookkeeping purposes even if their functions as rationing devices and allocative instruments are less important than their function as a supplementary tool in basic planning and distribution.
Consumer prices are also fixed prices except for the foodstuffs sold directly to the consumers by collective farm workers. They include a variety of taxes, such as excises on salt, matches and vodka, as well as sales or turnover taxes. Indeed, these comprise a major source of governmental revenue in direct contrast to the importance of income taxation in most western countries. Consumer prices are not intended as rationing devices, although they do provide the Soviet family with some degree of choice among ways to spend the family income. Overall, consumer prices do perform (somewhat imperfectly, of course) the equilibrating function of adjusting total purchasing power to total value of consumer goods produced. They do not, however, reflect meaningful changes in relative prices of specific goods, nor do they perform a rationing function with regard to specific goods. Rentals of apartments, for example, are very low relative to the prices of clothing. At the official rate of exchange, this might translate to $10 per month for an apartment (if one is lucky enough to get one) as compared with $500 for a woman's coat or $150 for a man's suit. Nor is the relative difference changed by using a more realistic rate as the black market rate for the ruble. The low price of housing apparently is considered a political necessity for the image of socialist society. It also seems probable that certain groups of individuals—such as party personnel, athletes, musicians, literary figures or artists—can be controlled or favored by the exercise of the rationing function on a political basis.
In describing the Soviet price structure, one scholar noted that their practices reverse the usual price behavior in underdeveloped countries. Low real wages in such nations seem normally to be associated with relatively high prices for capital goods; the prices of capital goods are relatively higher than the prices of consumer goods. Professor Jasny remarks that, “the peculiarity of the Soviet price system is that the means of production have become very cheap relative to wages and still cheaper relative to the prices of consumers' goods. This very peculiar type of relationship between the prices of producers' and of consumers' goods is indeed the feature which makes the Soviet price system unique.7/
This may be unique, but it is not difficult to understand why it developed. The overwhelming objective of Soviet economic policy was to force industrialization at a rapid rate. The price structure, enforced by state ownership of the means of production and by centralized dictatorship, brought into being a sort of compulsory saving that channeled a large part of the national product into industrial capital investment. This forced the rate of growth of the industrial sector at the expense of both the agricultural sector (by compulsory deliveries at low prices) and the current consumption sector (by prolonged scarcity of consumer goods).
This emphasis upon real investment in producers' goods—on heavy industry, military hardware and space activity, to be more precise—is a key to an understanding of the Soviet economy. In terms of success or failure as measured by the intent of the central planners, it achieved a substantial degree of success, even after allowing for the tendency of official statistics to overstate the case. Professor Nutter, for example, estimates that total Soviet industrial output increased by between 500$ and 600$ between 1913 and 1955.8/ This cannot but be regarded as a substantial accomplishment. From a truly underdeveloped nation, Soviet Russia has become one of the major industrial powers of the world.
In general Soviet production results from central planning in physical units by commands handed down from above. One exception to this general rule is agricultural production. The U.S.S.R. operates (1) large state owned farms; (2) collective farms; and (3) permits production and sales from privately owned plots. Both ideology and political power preferences would seem to invite complete elimination of private agricultural production and, as well, the complete transformation of the collective farms into state owned farms. This has not proved feasible. In contrast to the success of forced industrial growth by central direction, the poor performance of the agricultural sector has remained one of the most difficult problems for the Soviet economy. As early as 1928, Stalin called for the elimination of the peasant farmer as a class. He attempted to bring this about by a forced collectivization of farms during the nineteen thirties. In effect, his objective was accomplished but at a cost of direct or indirect deaths of perhaps 10 million peasants who resisted; at the cost of forced shifting of 20 or 25 million people to other activities; and at the cost of forcible combination of most of the remainder into collective farm units.
It should be noted that this forced collectivization had a logical basis. Industrialization required food for the favored group of factory workers. The forced collectivization, brutal as it was, prevented the peasant farmers from scuttling the entire program. The previous industrialization program of the twenties was followed by the so-called New Economic Policy—an adaptation forced upon the central planners by the failure of the peasants to furnish sufficient food. Since the thirties, the output of state owned farms has increased but the total output of the collective farms is larger still by far. Except for the output of the privately owned plots, this has been accomplished by forced production of compulsory deliveries at artificially low fixed prices.
The Soviet agricultural sector, in effect, has been forced to pay for the industrial real capital necessary for the growth of the industrial sector. As one scholar states it, “the differences between the prices the state pays for agricultural products and the prices it charges consumers have represented the main source of the state's capital accumulation. The prices of most compulsory deliveries remained virtually unchanged from 1928 to 1955, while consumer retail prices rose approximately eight times during the same period.”9/
Such a peculiar price structure reflects an equally peculiar property right structure. Agricultural performance is spotty, discontinuous and admittedly unsatisfactory. There is an element of private property in agriculture in privately worked acreage and privately owned livestock. In terms of total cultivated land, private acreage is small—something near 3$. In terms of total agricultural output, however, these private works account for between 30$ and 50$ depending upon the vagaries of nature, prices, measurements and biases. Even after allowances are made for the fact that grains for feeding livestock and poultry are not grown on the private plots, and for the artificiality of some prices, there still seems to be a substantial difference in output attributable to an incentive factor based on property rights.
Another feature of the altered property right structure is that the individual peasant is not free to leave the collective farm of his own volition. Permission to leave must be granted by the collective, and internal passports for physical movement can be made difficult to obtain if the authorities so desire. As a result, there seems to be a gradual but continuing deterioration of those remaining in agriculture as the young, presumably better educated, are drawn to the factories. Expert opinion seems to believe that urban workers' real incomes are something near twice those of agricultural workers. In the absence of effective barriers, one would expect a movement away from the farms and toward the more remunerative and rewarding employment in the cities. Evidence drawn from daily papers supports the conclusion.
The underpricing of Soviet agricultural products to obtain state capital recalls the half-facetious comment made a few years ago to the effect that you can tell a developed country from an under-developed country by examining agricultural pricing practices: under-developed countries pay their farmers too little; developed countries pay their farmers too much! No one should read too much into such a statement but it is remarkable how high the biserial correlation seems to be between the degree of industrialization and two kinds of price interference: (1) fixing agriculture prices below the market; and (2) fixing them above the market. Full industrialization may not be reached by the Soviets until they pay their farmers too much!
In brief, the Soviets have used prices as political tools and means for controlling the economy. The practical details to which Mises' original criticism applied in general have not gone unnoticed. Since Stalin's death increasing attention has been paid to alterations of incentives, to some recognition of the applicability of the profit motive to state owned enterprise but not to individuals, to suggestions for decentralization of the planning function, and to somewhat more flexible powers to set prices by the state owned plant manager rather than by central planners. The most widely noted discussions of pricing policies in recent years seem to have stemmed from the writings of Yevsei G. Liberman of Kharkov Engineering and Economic Institute.10/ Liberman proposed a measure of profitability expressed as a percent of capital employed to replace, as a measure of incentive, the fulfillment of assigned plan physical quotas. He also suggested increased autonomy for plant managers in setting prices, and advocated recognizing interest as a cost of production. The literature available in English has come to call these proposals “Libermanism,” although the basic ideas have been much discussed and extended by others. One eminent Soviet economist, V.S. Nemchinov, now deceased, forcefully criticized planning techniques in the U.S.S.R. as too centralized and unwieldy, inflexible in practice, and increasingly inapplicable to a world of ever growing complexity. He advocated decentralization, much greater price flexibility, payment of interest by factories on capital employed, and a system of bids and tenders by factory managers.11/
This seemingly significant abandonment of some of the positions long considered basic Marxist-Leninist idology and dogma has led some to suppose that the U.S.S.R. and its satellites may be moving in the direction of capitalism, and that this may make more probable some kind of rapprochement between planned economies and market-oriented economies. One scholar writes, “When Communists of high rank advance profit as the main measure of economic success and the main regulator of economic activity in lieu of planning, this indeed is something new, for it seems to constitute an admission that self-interest is the most important driving force in economic accomplishment. Such an admission may be the beginning of a deviation straight into the camp of capitalism, although they insist that this is not the case.”12/
On the other hand, many voices have been raised to caution against interpreting economic liberalization in pricing and production as part of a deliberate, conscious policy aimed at increasing the freedom of Soviet society and of the Soviet citizen. In the Swiss Review of World Affairs (Zurich), Dr. Willy Linder expressed doubt that there is a growing tendency toward a free market economy in the U.S.S.R. and concluded that the need to achieve some degree of economic rationality in “certain limited areas” is stronger than ideology.13/ Writing in 1960, Professor Wassily Leontiev noted that,” ... what the Soviets are about to adopt is Western economic science, not Western economic institutions.”14/
For fairly obvious reasons, those who have advocated price and other reforms in the U.S.S.R. and in the satellite countries try to avoid being classified as proponents of capitalism. Yet it seems clear that, by raising questions about the functions of a price mechanism, they are also raising serious questions about individual motivations and incentives and, indeed, private property rights.15/ But Marxism-Leninism in practice as well as in theory involves the abolition of property rights and the centralization of power in the state. The movement toward “market socialism” observed in some eastern European economies is a movement in the direction of market prices and, therefore, away from centralized control. But, automatically, then the question becomes political as well as economic.
Vested interests within the Soviet “establishment” cannot but be subjected to alterations in the distribution of power even if price reforms resulted only in some decentralization rather than major dispersal of power. How far will it be possible to twist and alter dogma so as to permit some market pricing, without forming a political threat to the existing regime? To suppose that an alteration of use rights to the means of production—a recognition of private property rights, perhaps by some other name like socialist use rights—can be reached without a major power clash seems like wishful thinking. Nor does the experience of Soviet armed intervention in Czechoslovakia provide much comfort.
Whatever the outcome (and since the future is always uncertain one is not entitled to predict it with confidence), a steady, rapid movement toward a market system either in the U.S.S.R. or the satellites seems unlikely. In addition to the myth of the disappearance of scarcity to which socialist economists seem forever addicted, there is also the fond hope expressed over and over again that modern electronic computers will provide, in the future, the key element for solving the problems of economic calculation and rationalization in a socialist society. Such a belief, even if it turns out to be as patently impossible as Mises originally asserted, or as impracticable as both Vilfredo Pareto and Enrico Barone believed, cannot help but to delay movements toward markets and market data experiments within the socialist camps.
Footnotes
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